There's frequent speculation among investors regarding what stocks Warren Buffett is going to buy next. But it isn't too tough to figure out some of the stocks that you'll never see in Buffett's portfolio. Here are three examples from our analysts.
For starters, one of Buffett's smartest investing rules is that he invests only in what he understands. He understands how Coca-Cola makes its money and grows, and he has a very good idea of where it will be in five years, so that's why he invests in it. Tesla is a bit more complicated.
Also, Buffett prefers companies that have a solid track record of profitability and that trade for reasonably low valuations. In both categories, Tesla is far from a Buffett-style investment.
The company just started turning a profit this year, and while earnings are expected to grow rapidly over the next few years, a lot of things will need to go right for the company to meet expectations. Currently, shares trade for more than 400 times 2014's expected earnings. Simply put, this is just too speculative for Buffett's taste.
Tesla is not a car company. It is a tech company, which is a category mostly absent from Berkshire's stock portfolio and will continue to be for years to come.
Keith Speights: There's one thing that Warren Buffett wants to do before he buys a stock: determine the underlying value of the business. That's why Buffett would be highly unlikely to buy a stock like Organovo Holdings (NASDAQ:ONVO).
Could he value Organovo using an earnings multiple? The bioprinting pioneer has no earnings. What about looking at revenue? Organovo made less than $400,000 over the past 12 months. Nevertheless, the market has valued the company at more than $500 million because of the potential of its 3D bioprinting technology.
Buffett certainly understands evaluating the potential for a company. He has done it day in and day out for decades. However, he wants a margin of safety with the buying price just in case his projection of that potential is off. With a development-stage company like Organovo, there's really no way to know what share price has an adequate margin of safety built in.
I suspect that Buffett would be fascinated by the possibility that Organovo could revolutionize health care by helping pharmaceutical companies develop new drugs more cost-effectively. But a stock of a company for which you can't reasonably determine its value? I can see Buffett saying, "The only time to buy these is on a day with no 'y' in it."
Jordan Wathen: Warren Buffett followers know that he loves a company's moat -- those distinguishing features that insulate a company from competition. For this reason, sea shipping companies including Capital Product Partners (NASDAQ:CPLP) are probably among the most unlikely companies to ever appear in Buffett's portfolio.
Sea shipping companies face some of the worst competitive dynamics. They use the same vessels to ship the same goods over the same seas. As a result, sea shippers have to compete on price to win customers. That begets low margins and low returns on capital invested in their fleets.
Even worse, shipping is a business predicated on what economists call the "pork cycle." When shipping rates are high, shipping firms order more vessels to carry more cargo. The ships aren't delivered until years after they're ordered. The result is that shipping companies have made a habit of purchasing too many ships during good years, only to destroy shipping rates and create muti-year bad cycles of depressed shipping prices.
Thanks to these competitive dynamics, I couldn't ever see a shipping stock in Buffett's portfolio. The industry is simply too competitive for investors to ever earn above-average returns.
Jordan Wathen, Keith Speights, and Matthew Frankel have no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, and Tesla Motors; owns shares of Berkshire Hathaway and Tesla Motors; and has options on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.